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EX-32.2 - EXHIBIT 32.2 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-063018xex3221.htm
EX-32.1 - EXHIBIT 32.1 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-063018xex3211.htm
EX-31.2 - EXHIBIT 31.2 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-063018xex3121.htm
EX-31.1 - EXHIBIT 31.1 - HEIDRICK & STRUGGLES INTERNATIONAL INChsii-063018xex3111.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
FORM 10-Q
 

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

OR

 ¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number 0-25837
 
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
36-2681268
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
233 South Wacker Drive-Suite 4900
Chicago, Illinois
60606-6303
(Address of Principal Executive Offices)

(312) 496-1200
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period of time that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
x
Non-Accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Emerging growth company
 
o
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 27, 2018, there were 18,958,669 shares of the Company’s common stock outstanding.
 




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
 
 
 
PAGE
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
Item 6.
 
 
 
 





PART I. FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)


June 30,
2018

December 31,
2017
 

(Unaudited)

 
Current assets


 
 
Cash and cash equivalents

$
85,825


$
207,534

Accounts receivable, net

153,948


98,700

Prepaid expenses

27,609


22,003

Other current assets

27,638


11,620

Income taxes recoverable

5,197


3,933

Total current assets

300,217


343,790

 
 
 
 
 
Non-current assets

 
 
 
Property and equipment, net

36,752


39,514

Assets designated for retirement and pension plans

16,668


17,130

Investments

21,621


21,319

Other non-current assets

19,491


8,999

Goodwill

122,838


118,892

Other intangible assets, net

2,919


2,158

Deferred income taxes

32,398

 
35,402

Total non-current assets

252,687


243,414

 
 
 
 
 
Total assets

$
552,904


$
587,204

 
 
 
 
 
Current liabilities

 
 
 
Accounts payable

$
8,723


$
9,824

Accrued salaries and employee benefits

120,668


177,426

Deferred revenue

40,184


31,272

Other current liabilities

37,318


40,346

Income taxes payable

6,189


6,924

Total current liabilities

213,082


265,792

 
 
 
 
 
Non-current liabilities

 
 
 
Accrued salaries and employee benefits

35,725


40,308

Retirement and pension plans

44,272


44,802

Other non-current liabilities

21,959


23,597

Total non-current liabilities

101,956


108,707

 
 
 
 
 
Total liabilities

315,038


374,499

 
 
 
 
 
Commitments and contingencies (Note 18)
 

 

 
 
 
 
 
Stockholders’ equity
 
 
 
 
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued at June 30, 2018 and December 31, 2017
 

 

Common stock, $0.01 par value, 100,000,000 shares authorized, 19,585,777 shares issued, 18,954,271 and 18,781,433 shares outstanding at June 30, 2018 and December 31, 2017, respectively
 
196

 
196

Treasury stock at cost, 631,506 and 804,344 shares at June 30, 2018 and December 31, 2017, respectively
 
(20,299
)
 
(26,096
)
Additional paid in capital
 
222,053

 
226,006

Retained earnings (deficit)
 
30,916

 
(716
)
Accumulated other comprehensive income
 
5,000

 
13,315

Total stockholders’ equity
 
237,866

 
212,705

 
 
 
 
 
Total liabilities and stockholders’ equity
 
$
552,904

 
$
587,204

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

1




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Revenue before reimbursements (net revenue)
$
183,059

 
$
152,214

 
$
343,130

 
$
292,220

Reimbursements
4,630

 
4,904

 
9,217

 
9,075

Total revenue
187,689

 
157,118

 
352,347

 
301,295

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Salaries and employee benefits
127,679

 
103,378

 
239,088

 
200,613

General and administrative expenses
36,919

 
38,089

 
72,460

 
74,222

Impairment charges

 
39,158

 

 
39,158

Reimbursed expenses
4,630

 
4,904

 
9,217

 
9,075

Total operating expenses
169,228

 
185,529

 
320,765

 
323,068

 
 
 
 
 
 
 
 
Operating income (loss)
18,461

 
(28,411
)
 
31,582

 
(21,773
)
 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
Interest, net
(2
)
 
(96
)
 
237

 
101

Other, net
(48
)
 
(179
)
 
(496
)
 
(2,920
)
Net non-operating expense
(50
)
 
(275
)
 
(259
)
 
(2,819
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
18,411

 
(28,686
)
 
31,323

 
(24,592
)
 
 
 
 
 
 
 
 
Provision for (benefit from) income taxes
6,948

 
(10,438
)
 
9,692

 
(6,994
)
 
 
 
 
 
 
 
 
Net income (loss)
11,463

 
(18,248
)
 
21,631

 
(17,598
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustment
(3,816
)
 
2,967

 
(2,226
)
 
4,784

Net unrealized gain on available-for-sale investments

 
426

 

 
1,234

Other comprehensive income (loss), net of tax
(3,816
)
 
3,393

 
(2,226
)
 
6,018

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
7,647

 
$
(14,855
)
 
$
19,405

 
$
(11,580
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
18,934

 
18,749

 
18,880

 
18,689

Diluted
19,328

 
18,749

 
19,389

 
18,689

 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.61

 
$
(0.97
)
 
$
1.15

 
$
(0.94
)
Diluted
$
0.59

 
$
(0.97
)
 
$
1.12

 
$
(0.94
)
 
 
 
 
 
 
 
 
Cash dividends paid per share
$
0.13

 
$
0.13

 
$
0.26

 
$
0.26

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

2




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
 
 
 
 
 
Additional
Paid in
Capital
 
Retained Earnings (Deficit)
 
Accumulated
Other
Comprehensive
Income
 
Total
 
Common Stock
 
Treasury Stock
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at December 31, 2017
19,586

 
$
196

 
805

 
$
(26,096
)
 
$
226,006

 
$
(716
)
 
$
13,315

 
$
212,705

Net income

 

 

 

 

 
21,631

 


 
21,631

Adoption of accounting standards

 

 

 

 

 
15,043

 
(6,089
)
 
8,954

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
(2,226
)
 
(2,226
)
Common and treasury stock transactions:

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
3,852

 

 

 
3,852

Vesting of equity, net of tax withholdings

 

 
(167
)
 
5,603

 
(7,836
)
 

 

 
(2,233
)
Re-issuance of treasury stock

 

 
(6
)
 
194

 
31

 

 

 
225

Cash dividends declared ($0.26 per share)

 

 

 

 

 
(4,925
)
 

 
(4,925
)
Dividend equivalents on restricted stock units

 

 

 

 

 
(117
)
 

 
(117
)
Balance at June 30, 2018
19,586

 
$
196

 
632

 
$
(20,299
)
 
$
222,053

 
$
30,916

 
$
5,000

 
$
237,866

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


3




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 

Six Months Ended
June 30,
 

2018

2017
Cash flows - operating activities




Net income (loss)

$
21,631


$
(17,598
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 
Depreciation and amortization

6,493


7,566

Deferred income taxes

(347
)

(15,323
)
Stock-based compensation expense

3,852


3,716

Accretion expense related to earnout payments

647


625

Impairment charges
 

 
39,158

Changes in assets and liabilities, net of effects of acquisitions:

 

 
Accounts receivable

(55,397
)

(28,516
)
Accounts payable

(1,797
)

63

Accrued expenses

(60,116
)

(80,558
)
Restructuring accrual
 
(8,885
)
 

Deferred revenue

(2,626
)

3,334

Income taxes payable, net

(3,066
)

2,018

Retirement and pension plan assets and liabilities

121


2,892

Prepaid expenses

(5,879
)

(1,351
)
Other assets and liabilities, net

(1,691
)

(2,238
)
Net cash used in operating activities

(107,060
)

(86,212
)
 
 
 
 
 
Cash flows - investing activities




Acquisition of business
 
(3,161
)
 
(114
)
Capital expenditures

(2,548
)
 
(10,443
)
Purchases of available-for-sale investments

(1,891
)
 
(1,963
)
Proceeds from sales of available-for-sale investments

1,564

 
374

Net cash used in investing activities

(6,036
)
 
(12,146
)
 
 
 
 
 
Cash flows - financing activities




Proceeds from line of credit
 
20,000

 
40,000

Payments on line of credit

(20,000
)
 
(40,000
)
Cash dividends paid

(5,042
)
 
(5,159
)
Payment of employee tax withholdings on equity transactions

(2,233
)
 
(2,392
)
Acquisition earnout payments


 
(4,497
)
Net cash used in financing activities

(7,275
)
 
(12,048
)
 
 
 
 
 
Effect of exchange rates fluctuations on cash, cash equivalents and restricted cash
 
(1,359
)
 
3,620

 
 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
 
(121,730
)
 
(106,786
)
Cash, cash equivalents and restricted cash at beginning of period
 
208,162

 
165,569

Cash, cash equivalents and restricted cash at end of period
 
$
86,432

 
$
58,783

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


4




HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except per share figures)
(Unaudited) 

1.
Basis of Presentation of Interim Financial Information

The accompanying unaudited Condensed Consolidated Financial Statements of Heidrick & Struggles International, Inc. and subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Significant items subject to estimates and assumptions include revenue recognition, income taxes, interim effective tax rate and assessment of goodwill and other intangible assets for impairment. Estimates are subject to a degree of uncertainty and actual results could differ from these estimates. These financial statements and notes are to be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 13, 2018.

2.
Summary of Significant Accounting Policies

A complete listing of the Company’s significant accounting policies is discussed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Revenue Recognition

As a result of the adoption of ASU 2014-09, Revenue from Contracts with Customers, the Company's accounting policy for revenue recognition has been updated. See Note 3, Revenue.

Restricted Cash

The Company has lease agreements and business licenses with terms that require the Company to restrict cash through the termination dates of the agreements. Current and non-current restricted cash is included in Other current assets and Other non-current assets, respectively, in the Condensed Consolidated Balance Sheets.

The following table provides a reconciliation of the cash and cash equivalents between the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statement of Cash Flows as of June 30, 2018 and 2017, and December 31, 2017 and 2016:
 
June 30,
 
December 31,
 
2018
 
2017
 
2017
 
2016
Cash and cash equivalents
$
85,825

 
$
58,178

 
$
207,534

 
$
165,011

Restricted cash included within other current assets
508

 
259

 
526

 
139

Restricted cash included within other non-current assets
99

 
346

 
102

 
419

Total cash, cash equivalents and restricted cash
$
86,432

 
$
58,783

 
$
208,162

 
$
165,569


Reclassifications

Certain prior year amounts have been recast as a result of the change in the Company's operating segments and adoption of ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. The reclassifications had no impact on net income, net cash flows or stockholders' equity.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income by weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Common equivalent shares are excluded from the determination of diluted earnings per share in periods in which they have an anti-dilutive effect.


5




The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
11,463

 
$
(18,248
)
 
$
21,631

 
$
(17,598
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
18,934

 
18,749

 
18,880

 
18,689

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted stock units
250

 

 
355

 

Performance stock units
144

 

 
153

 

Diluted
19,328

 
18,749

 
19,389

 
18,689

Basic earnings per share
$
0.61

 
$
(0.97
)
 
$
1.15

 
$
(0.94
)
Diluted earnings per share
$
0.59

 
$
(0.97
)
 
$
1.12

 
$
(0.94
)

Weighted average restricted stock units and performance stock units outstanding that could be converted into approximately 225,000 and 84,000 common shares, respectively, for the three months ended June 30, 2017, were not included in the computation of diluted earnings per share because the effects would have been anti-dilutive. Weighted average restricted stock units and performance stock units outstanding that could be converted into approximately 384,000 and 144,000 common shares, respectively, for the six months ended June 30, 2017, were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Recently Issued Financial Accounting Standards

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, Income Statement - Reporting Comprehensive Income, intended to improve the usefulness of information reported as a result of the Tax Cuts and Jobs Act. The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.

In February 2016, the FASB issued ASU No. 2016-02, Leases, intended to improve financial reporting about leasing transactions. The new guidance will require entities that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations created by those leases and to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of this accounting guidance. The effect is not known or reasonably estimable at this time.

Recently Adopted Financial Accounting Standards

On January 1, 2018, the Company adopted ASU No. 2017-09, Compensation - Stock Compensation, Scope of Modification Accounting, which is intended to provide clarity and reduce both diversity in practice, cost and complexity when implementing a change in the terms or conditions of a share-based payment award. ASU 2017-09 requires that an entity should account for the effects of a modification unless the fair value, vesting conditions, and whether the award is classified as a liability instrument or an equity instrument remain unchanged in the modification. The adoption of this guidance did not have an impact on the Company's financial statements. The future impact of this accounting guidance will be dependent on future modification events including the number of awards modified.

On January 1, 2018, the Company adopted ASU No. 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, which is intended to improve the consistency, transparency and usefulness of net benefit cost disclosures. ASU 2017-07 requires that an employer report the service cost component of net benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Additionally, the other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The adoption of this guidance did not have an impact on the Company's financial statements.

On January 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally

6




described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The adoption of this guidance increased the Company's beginning and ending balances of cash, cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows by approximately $0.6 million for each period presented. Changes in the Company's restricted cash balances between periods are immaterial.

On January 1, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice as to how certain cash receipts and cash payments should be presented and classified. The adoption of this guidance did not have an impact on the Company's financial statements.

On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments including the recognition of unrealized changes in fair value within net income. The adoption of this guidance resulted in a reclassification of accumulated unrealized gains of approximately $6.1 million from accumulated other comprehensive income to retained earnings. The impact of the adoption of this guidance on the Company's Condensed Consolidated Statement of Comprehensive Income for the six months ended June 30, 2018, was not material. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods.

On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, using the modified retrospective method. The Company applied the guidance to all contracts that were not complete as of the adoption date. The guidance requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for these goods or services. The Company recognized the cumulative effect of initially applying the new guidance as an adjustment to the opening balance of retained earnings. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods.

Impacts on Financial Statements of Recently Adopted Financial Accounting Standards

The cumulative effect of the changes made to our Condensed Consolidated Balance Sheet as of January 1, 2018 as a result of the adoption of ASU 2014-09, Revenue from Contracts with Customers, and ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities were as follows:

 
December 31,
2017
 
ASU 2014-09 Adjustments
 
ASU 2016-01 Adjustments
 
January 1,
2018
Current assets
 
 
 
 
 
 
 
Other current assets
$
11,620

 
$
14,689

 
$

 
$
26,309

Total current assets
343,790

 
14,689

 

 
358,479

 
 
 
 
 
 
 
 
Non-current assets
 
 
 
 
 
 
 
Deferred income taxes
35,402

 
(3,099
)
 

 
32,303

Total non-current assets
243,414

 
(3,099
)
 

 
240,315

 
 
 
 
 
 
 
 
Total assets
$
587,204

 
$
11,590

 
$

 
$
598,794

 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
Deferred revenue
31,272

 
(1,059
)
 

 
30,213

Other current liabilities
40,346

 
3,695

 

 
44,041

Total current liabilities
265,792

 
2,636

 

 
268,428

 
 
 
 
 
 
 
 
Total liabilities
$
374,499

 
$
2,636

 
$

 
$
377,135

 
 
 
 
 
 
 
 
Stockholders' equity
 
 
 
 
 
 
 
Retained earnings (deficit)
(716
)
 
8,954

 
6,089

 
14,327

Accumulated other comprehensive income
13,315

 

 
(6,089
)
 
7,226

Total stockholders’ equity
212,705

 
8,954

 

 
221,659

 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
587,204

 
$
11,590

 
$

 
$
598,794



7




The impact of ASU 2014-09, Revenue from Contracts with Customers, on our Condensed Consolidated Balance Sheet as of June 30, 2018 was as follows:
 
June 30, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption Higher/(Lower)
Current assets
 
 
 
 
 
Other current assets
$
27,638

 
$
12,221

 
15,417

Total current assets
300,217

 
$
284,800

 
15,417

 
 
 
 
 
 
Non-current assets
 
 
 
 
 
Deferred income taxes
32,398

 
35,497

 
(3,099
)
Total non-current assets
252,687

 
255,786

 
(3,099
)
 
 
 
 
 
 
Total assets
$
552,904

 
$
540,586

 
12,318

 
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accrued salaries and employee benefits
120,668

 
119,638

 
1,030

Deferred revenue
40,184

 
42,032

 
(1,848
)
Other current liabilities
37,318

 
33,332

 
3,986

Income taxes payable
6,189

 
6,051

 
138

Total current liabilities
213,082

 
209,776

 
3,306

 
 
 
 
 
 
Total liabilities
$
315,038

 
$
311,732

 
$
3,306

 
 
 
 
 
 
Stockholders' equity
 
 
 
 
 
Retained earnings (deficit)
30,916

 
21,652

 
9,264

Total stockholders’ equity
237,866

 
228,854

 
9,012

 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
552,904

 
$
540,586

 
$
12,318





8




The impact of ASU 2014-09, Revenue from Contracts with Customers, on our Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2018 were as follows:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption
Higher/(Lower)
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption
Higher/(Lower)
Revenue
 
 
 
 
 
 
 
 
 
 
 
Revenue before reimbursements (net revenue)
$
183,059

 
$
184,058

 
$
(999
)
 
$
343,130

 
$
341,652

 
$
1,478

Reimbursements
4,630

 
4,630

 

 
9,217

 
9,217

 

Total revenue
187,689

 
188,688

 
(999
)
 
352,347

 
350,869

 
1,478

 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
127,679

 
128,373

 
(694
)
 
239,088

 
238,058

 
1,030

General and administrative expenses
36,919

 
36,919

 

 
72,460

 
72,460

 

Reimbursed expenses
4,630

 
4,630

 

 
9,217

 
9,217

 

Total operating expenses
169,228

 
169,922

 
(694
)
 
320,765

 
319,735

 
1,030

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
18,461

 
18,766

 
(305
)
 
31,582

 
31,134

 
448

 
 
 
 
 
 
 
 
 
 
 
 
Non-operating income (expense)
 
 
 
 
 
 
 
 
 
 
 
Interest, net
(2
)
 
(2
)
 

 
237

 
237

 

Other, net
(48
)
 
(48
)
 

 
(496
)
 
(496
)
 

Net non-operating income (expense)
(50
)
 
(50
)
 

 
(259
)
 
(259
)
 

 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
18,411

 
18,716

 
(305
)
 
31,323

 
30,875

 
448

 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
6,948

 
7,038

 
(90
)
 
9,692

 
9,554

 
138

 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
11,463

 
$
11,678

 
$
(215
)
 
$
21,631

 
$
21,321

 
$
310

 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.61

 
$
0.62

 
$
(0.01
)
 
$
1.15

 
$
1.13

 
$
0.02

Diluted earnings per share
$
0.59

 
$
0.60

 
$
(0.01
)
 
$
1.12

 
$
1.10

 
$
0.02


The impact of ASU 2014-09, Revenue from Contracts with Customers, on our Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2018 were as follows:
 
Six Months Ended June 30, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Adoption
Higher/(Lower)
Cash flows - operating activities
 
 
 
 
 
Net income
$
21,631

 
$
21,321

 
$
310

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
 
 
Accrued expenses
(60,116
)
 
(65,132
)
 
5,016

Deferred revenue
(2,626
)
 
1,471

 
(4,097
)
Income taxes payable, net
(3,066
)
 
(3,204
)
 
138

Other assets and liabilities, net
$
(1,691
)
 
$
(324
)
 
$
(1,367
)


9




3.
Revenue

Executive Search

Revenue is recognized as we satisfy performance obligations by transferring a good or service to a customer. Generally, each of our executive search contracts contain one performance obligation which is the process of identifying potentially qualified candidates for a specific client position. In most contracts, the transaction price includes both fixed and variable consideration. Fixed compensation is comprised of a retainer, equal to approximately one-third of the estimated first year compensation for the position to be filled, and indirect expenses, equal to a specified percentage of the retainer, as defined in the contract. The Company generally bills its clients for its retainer and indirect expenses in one-third increments over a three-month period commencing in the month of a client’s acceptance of the contract. If actual compensation of a placed candidate exceeds the original compensation estimate, the Company is often authorized to bill the client for one-third of the excess compensation. The Company refers to this additional billing as uptick revenue. In most contracts, variable consideration is comprised of uptick revenue and direct expenses. The Company bills its clients for uptick revenue upon completion of the executive search and direct expenses are billed as incurred.

As required under ASU 2014-09, and as described in Note 2, Summary of Significant Accounting Policies, the Company now estimates uptick revenue at contract inception, based on a portfolio approach, utilizing the expected value method based on a historical analysis of uptick revenue realized in the Company’s geographic regions and industry practices, which results in an initial recording of a contract’s uptick revenue that is probable not to result in a significant reversal of cumulative revenue recognized when the actual amount of uptick revenue for that contract is known. Differences between the estimated and actual amount of variable consideration are recorded when known. The Company does not estimate revenue for direct expenses as it is not materially different than recognizing revenue as direct expenses are incurred.

Revenue on our executive search engagement performance obligation is recognized over time as our clients simultaneously receive and consume the benefits provided by the Company's performance.  Revenue from executive search engagements is recognized over the expected average period of performance, in proportion to the estimated personnel time incurred to fulfill our obligations under the executive search contract. Revenue is generally recognized over a period of approximately six months.

Our executive search contracts contain a replacement guarantee which provides for an additional search to be completed, free of charge except for expense reimbursements, should the candidate presented by the Company be hired by the client and subsequently terminated by the customer for performance reasons within a specified period of time. The replacement guarantee is an assurance warranty, that is not a performance obligation under the terms of the executive search contract, as the Company does not provide any services under the terms of the guarantee that transfer benefits to the customer in excess of assuring that the identified candidate complies with the agreed-upon specifications. The Company accounts for the replacement guarantee under the relevant warranty guidance in ASC 460 - Guarantees.

Heidrick Consulting

Revenue is recognized as we satisfy performance obligations by transferring a good or service to a customer. Heidrick Consulting enters into contracts with customers, that outline the general terms and conditions of the assignment, to provide succession planning, executive assessment, top team and board effectiveness and culture shaping programs. The consideration the Company expects to receive under each contract generally includes only fixed consideration. Most of our consulting contracts contain one performance obligation which is the overall process of the consulting service requested by the client. The majority of our consulting revenue is recognized over time utilizing both input and output methods. Contracts that contain coaching sessions, training sessions or the completion of assessments are recognized using the output method as each session or assessment is delivered to the client. Contracts that contain general consulting work are recognized using the input method utilizing a measure of progress that is based on time incurred on the project.
The Company enters into enterprise agreements with customers to provide a license for online access, via the Company's SD Connect platform, to training and other proprietary material related to the Company's culture shaping programs. The consideration the Company expects to receive under the terms of an enterprise agreement is comprised of a single fixed fee. Our enterprise agreements contain multiple performance obligations, the delivery of materials via SD Connect and material rights related options to renew the Enterprise Agreement at a significant discount. The Company allocates the transaction price to the performance obligations in the contract on a stand-alone selling price basis. The stand-alone selling price for the initial term of the Enterprise Agreement is outlined in the contract and is equal to the price paid by the customer for the agreement over the initial term of the contract. The stand-alone selling price for the options to renew, or material right, are not directly observable and must be estimated. This estimate is required to reflect the discount the customer would obtain when exercising the option to renew, adjusted for the likelihood that the option will be exercised. The Company estimates the likelihood of renewal using a historical analysis of customer renewals. Access to SD Connect represents a right to access the Company’s intellectual property that the customer simultaneously receives and consumes as the Company performs under the agreement, and, therefore, the Company recognizes revenue over time. Given the continuous nature of this commitment, the Company utilizes straight-line ratable revenue recognition over the estimated

10




subscription period as the Company's customers will receive and consume the benefits from SD Connect equally throughout the contract period. Revenue related to customer renewals of Enterprise Agreements is recognized over the term of the renewal, which is generally twelve months. Enterprise Agreements do not comprise a significant portion of the Company's revenue.

Contract Balances

Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Contract assets and liabilities are classified as current due to the nature of the Company's contracts, which are completed within one year. Contract assets are included within Other Current Assets on the Condensed Consolidated Balance Sheets.

Unbilled receivables: Unbilled revenue represents contract assets from revenue recognized over time in excess of the amount billed to the customer and the amount billed to the customer is solely dependent upon the passage of time. This amount includes revenue recognized in excess of billed executive search retainers and Heidrick Consulting fees.

Contract assets: Contract assets represent revenue recognized over time in excess of the amount billed to the customer and the amount billed to the customer is not solely subject to the passage of time. This amount primarily includes revenue recognized for upticks and contingent placement fees in executive search contracts.

Deferred revenue: Contract liabilities consist of deferred revenue, which is equal to billings in excess of revenue recognized.

The following table outlines the changes in our contract asset and liability balances during the period:
 
January 1,
2018
 
June 30,
2018
 
Variance
Contract assets
 
 
 
 
 
Unbilled receivables
$
5,487

 
$
9,733

 
$
4,246

Contract assets
12,398

 
11,273

 
(1,125
)
 
 
 
 
 
 
Contract liabilities
 
 
 
 
 
Deferred revenue
$
30,370

 
$
40,184

 
$
9,814


During the six months ended June 30, 2018, we recognized revenue of $26.1 million that was included in the contract liabilities balance at the beginning of the period. The amount of revenue recognized during the six months ended June 30, 2018 from performance obligations partially satisfied in previous periods as a result of changes in the estimates of variable consideration was $17.4 million.

Each of the Company's contracts has an expected duration of one year or less. Accordingly, the Company has elected to utilize the available practical expedient related to the disclosure of the transaction price allocated to the remaining performance obligations under its contracts. The Company has also elected the available practical expedients related to adjusting for the effects of a significant financing component and the capitalization of contract acquisition costs. The Company charges and collects from its customers sales tax and value added taxes as required by certain jurisdictions. The Company has made an accounting policy election to exclude these items from the transaction price in its contracts.

4.
Allowance for Doubtful Accounts

The activity of the allowance for doubtful accounts is as follows:
Balance at December 31, 2017
$
2,534

Provision charged to income
3,056

Write-offs
(1,049
)
Foreign currency translation
34

Balance at June 30, 2018
$
4,575



11




5.
Property and Equipment, net

The components of the Company’s property and equipment are as follows:
 
June 30,
2018
 
December 31,
2017
Leasehold improvements
$
47,592

 
$
48,216

Office furniture, fixtures and equipment
18,159

 
17,732

Computer equipment and software
28,534

 
28,300

Property and equipment, gross
94,285

 
94,248

Accumulated depreciation
(57,533
)
 
(54,734
)
Property and equipment, net
$
36,752

 
$
39,514


Depreciation expense for the three months ended June 30, 2018 and 2017 was $2.8 million and $2.7 million, respectively. Depreciation expense for the six months ended June 30, 2018 and 2017 was $5.6 million and $4.5 million, respectively.

6.
Investments

The Company has a U.S. non-qualified deferred compensation plan that consists primarily of U.S. marketable securities and mutual funds, all of which are valued using Level 1 inputs (See Note 7, Fair Value Measurements). The fair value for these investments was $21.6 million and $21.3 million as of June 30, 2018 and December 31, 2017, respectively. The aggregate cost basis for these investments was $15.5 million and $14.6 million as of June 30, 2018 and December 31, 2017, respectively.
 
7.
Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of inputs used to measure fair value are as follows:
 
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following tables provide a summary of the fair value measurements at June 30, 2018 and December 31, 2017 for each major category of assets and liabilities measured at fair value on a recurring basis:
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Balance at June 30, 2018
 
 
 
 
 
 
 
 
U.S. non-qualified deferred compensation plan
 
$
21,621

 
$

 
$

 
$
21,621

Assets designated for retirement and pension plans
 

 
18,089

 

 
18,089

Pension benefit obligation
 

 
(23,248
)
 

 
(23,248
)
Acquisition earnout accruals
 

 

 
(10,698
)
 
(10,698
)
 
 
$
21,621

 
$
(5,159
)
 
$
(10,698
)
 
$
5,764

 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Balance at December 31, 2017
 
 
 
 
 
 
 
 
U.S. non-qualified deferred compensation plan
 
$
21,319

 
$

 
$

 
$
21,319

Assets designated for retirement and pension plans
 

 
18,590

 

 
18,590

Pension benefit obligation
 

 
(23,886
)
 

 
(23,886
)
Acquisition earnout accruals
 

 

 
(7,213
)
 
(7,213
)
 
 
$
21,319

 
$
(5,296
)
 
$
(7,213
)
 
$
8,810


12




The Level 2 assets above are reinsurance contracts fair valued in accordance with BaFin - German Federal Financial Supervisory Authority guidelines, which utilize observable inputs including mortality tables and discount rates. The Level 3 liabilities include accruals for future earnout payments related to prior acquisitions, the values of which are determined based on discounted cash flow models. The Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, and accounts payable, to approximate the fair value of the respective assets and liabilities at June 30, 2018 and December 31, 2017, based upon the short-term nature of the assets and liabilities.

The following table provides a reconciliation of the beginning and ending balance of Level 3 assets and liabilities for the six months ended June 30, 2018:
 
Acquisition
Earnout
Accruals
Balance at December 31, 2017
$
(7,213
)
Acquisition earnouts (Note 8)
(3,054
)
Earnout accretion
(647
)
Foreign currency translation
216

Balance at June 30, 2018
$
(10,698
)

8.
Acquisitions

On January 4, 2018, the Company acquired Amrop A/S ("Amrop"), a Denmark-based provider of executive search services for 24.3 million Danish Kroner (equivalent to $3.9 million on the acquisition date) of initial consideration which was funded from existing cash. The former owners of Amrop are expected to receive additional cash consideration based on fee revenue generated during the two-year period following the completion of the acquisition. When estimating the value of future cash consideration, the Company has accrued $3.1 million on the acquisition date. The Company recorded $1.7 million of intangible assets related to customer relationships and $5.1 million of goodwill. The goodwill is primarily related to the acquired workforce and strategic fit.

9.
Goodwill and Other Intangible Assets

Goodwill

The Company's goodwill by segment is as follows:
 
June 30,
2018
 
December 31, 2017
Executive Search
 
 
 
Americas
$
88,535

 
$
88,690

Europe
48,892

 
44,407

Asia Pacific
8,918

 
9,302

Total Executive Search
146,345

 
142,399

Heidrick Consulting
36,257

 
36,257

Goodwill, gross
182,602

 
178,656

Accumulated impairment
(59,764
)
 
(59,764
)
Goodwill, net
$
122,838

 
$
118,892


Changes in the carrying amount of goodwill by segment for the six months ended June 30, 2018, are as follows:
 
Executive Search
 
Heidrick Consulting
 
 
 
Americas
 
Europe
 
Asia Pacific
 
 
Total
Gross goodwill at December 31, 2017
$
88,690

 
$
44,407

 
$
9,302

 
$
36,257

 
$
178,656

Accumulated impairment

 
(23,507
)
 

 
(36,257
)
 
(59,764
)
Net goodwill at December 31, 2017
88,690

 
20,900

 
9,302

 

 
118,892

Amrop acquisition

 
5,080

 

 

 
5,080

Foreign currency translation
(155
)
 
(595
)
 
(384
)
 

 
(1,134
)
Net goodwill at June 30, 2018
$
88,535

 
$
25,385

 
$
8,918

 
$

 
$
122,838


On January 4, 2018, the Company acquired Amrop and included the fair value of the acquired assets and liabilities as of the acquisition date in the Condensed Consolidated Balance Sheets. The Company included $5.1 million of goodwill related to the

13




acquisition in the Europe segment.

During the six months ended June 30, 2017, the Company determined that the goodwill within the Culture Shaping reporting unit was impaired, which resulted in an impairment charge of $29.3 million to write-off all of the goodwill. The impairment charge is recorded within Impairment charges in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2017. The impairment was non-cash in nature and did not affect our current liquidity, cash flows, borrowing capability or operations; nor did it impact the debt covenants under our credit agreement. Effective January 1, 2018, the Company completed its integration of the Culture Shaping reporting unit into the newly created Heidrick Consulting reporting unit.

Other Intangible Assets, net

The Company’s other intangible assets, net by segment, are as follows:
 
June 30,
2018
 
December 31, 2017
Executive Search
 
 
 
Americas
$
132

 
$
252

Europe
2,694

 
1,799

Asia Pacific
93

 
107

Total Executive Search
2,919

 
2,158

Heidrick Consulting

 

Total other intangible assets, net
$
2,919

 
$
2,158


The Company recorded customer relationships in the Europe segment of $1.7 million related to the acquisition of Amrop.

During the six months ended June 30, 2017, the Company determined that the intangible assets within the Culture Shaping reporting unit were impaired, which resulted in an impairment charge of $9.9 million to write-off all of the intangible assets. The impairment charge is recorded within Impairment charges in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2017. The impairment was non-cash in nature and did not affect our current liquidity, cash flows, borrowing capability or operations; nor did it impact the debt covenants under our credit agreement.

The carrying amount of amortizable intangible assets and the related accumulated amortization are as follows:
 
Weighted
Average
Life (Years)
 
June 30, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Client relationships
6.9
 
$
15,218

 
$
(12,308
)
 
$
2,910

 
$
13,703

 
$
(11,612
)
 
$
2,091

Trade name
0.0
 
449

 
(449
)
 

 
459

 
(459
)
 

Non-compete
2.0
 
225

 
(216
)
 
9

 
230

 
(163
)
 
67

Total intangible assets
6.9
 
$
15,892

 
$
(12,973
)
 
$
2,919

 
$
14,392

 
$
(12,234
)
 
$
2,158


Intangible asset amortization expense for the three months ended June 30, 2018 and 2017 was $0.5 million and $1.3 million, respectively. Intangible asset amortization expense for the six months ended June 30, 2018 and 2017 was $0.9 million and $3.0 million, respectively.

The Company's estimated future amortization expense related to intangible assets as of June 30, 2018, for the years ended December 31st is as follows:
 
Estimated Future Amortization
2018
$
638

2019
869

2020
544

2021
367

2022
248

Thereafter
253

Total
$
2,919



14




10.
Other Current Assets and Liabilities and Non-Current Liabilities

The components of other current assets are as follows:
 
June 30,
2018
 
December 31,
2017
Contract assets
$
21,006

 
$
3,538

Other
6,632

 
8,082

Total other current assets
$
27,638

 
$
11,620


The components of other current liabilities are as follows:
 
June 30,
2018
 
December 31,
2017
Restructuring charges
$
4,104

 
$
13,023

Other
33,214

 
27,323

Total other current liabilities
$
37,318

 
$
40,346


The components of other non-current liabilities are as follows:
 
June 30,
2018
 
December 31,
2017
Premise related costs
$
16,617

 
$
18,360

Accrued earnout payments
3,248

 
3,076

Restructuring charges

 
10

Other
2,094

 
2,151

Total other non-current liabilities
$
21,959

 
$
23,597


11.
Line of Credit

On June 30, 2015, the Company entered into a Second Amended and Restated Credit Agreement (the “Restated Credit Agreement”). The Restated Credit Agreement amended and restated the Credit Agreement executed on June 22, 2011 (the “Credit Agreement”). Pursuant to the Restated Credit Agreement, the Company replaced its Revolving Facility and Term Facility (“Existing Facility”) with a single senior unsecured revolving line of credit with an aggregate commitment of up to $100 million, which includes a sublimit of $25 million for letters of credit, and a $50 million expansion feature (the “Replacement Facility”). The Replacement Facility will mature on June 30, 2020. Borrowings under the Restated Credit Agreement bear interest at the Company’s election at the existing Alternate Base Rate (as defined in the Credit Agreement) or Adjusted LIBOR Rate (as defined in the Credit Agreement) plus a spread as determined by the Company’s leverage ratio.

Borrowings under the Replacement Facility may be used for working capital, capital expenditures, permitted acquisitions (as defined in the Restated Credit Agreement) and for other general corporate purposes of the Company and its subsidiaries. The obligations under the Replacement Facility are guaranteed by certain of the Company’s subsidiaries.

During the six months ended June 30, 2018, the Company borrowed $20.0 million under the Restated Credit Agreement and elected the Adjusted LIBOR Rate. The Company subsequently repaid $20.0 million during the six months ended June 30, 2018.

As of June 30, 2018 and December 31, 2017, the Company had no outstanding borrowings under the Restated Credit Agreement.

The Company was in compliance with the financial and other covenants under the Restated Credit Agreement and no event of default existed.
 
12.
Stock-Based Compensation

The Company’s 2012 Heidrick & Struggles GlobalShare Program (the “2012 Program”) provides for grants of stock options, stock appreciation rights, and other stock-based awards that are valued based upon the grant date fair value of shares. These awards may be granted to directors, selected employees and independent contractors. The 2012 Program originally authorized 1,300,000 shares of Common Stock for issuance pursuant to awards under the plan.

On May 22, 2014, the stockholders of the Company approved an amendment to the 2012 Program to increase the number of shares of Common Stock reserved for issuance under the 2012 Program by 700,000 shares. On May 24, 2018, the stockholders of the Company approved an amendment to the 2012 Program to increase the number of shares of Common Stock reserved for issuance under the 2012 Program by 850,000 shares. As of June 30, 2018, 2,035,742 awards have been issued under the 2012 Program and 1,454,788 shares remain available for future awards, including 640,530 forfeited awards. The 2012 Program provides that no awards can be granted after May 24, 2022.

The Company measures its stock-based compensation costs based on the grant date fair value of the awards and recognizes these costs in the financial statements over the requisite service period.

A summary of information with respect to stock-based compensation is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Salaries and employee benefits
$
1,513

 
$
1,738

 
$
3,289

 
$
3,378

General and administrative expenses
563

 
338

 
563

 
338

Income tax benefit related to stock-based compensation included in net income
550

 
819

 
1,021

 
1,466


Restricted Stock Units

Restricted stock unit activity for the six months ended June 30, 2018:
 
Number of
Restricted
Stock Units
 
Weighted-
Average
Grant-Date
Fair Value
Outstanding on December 31, 2017
491,154

 
$
21.92

Granted
183,546

 
31.11

Vested and converted to common stock
(199,550
)
 
21.66

Forfeited
(46,877
)
 
24.30

Outstanding on June 30, 2018
428,273

 
$
25.72


As of June 30, 2018, there was $5.6 million of pre-tax unrecognized compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted average of 2.3 years.

Performance Stock Units

The Company grants performance stock units to certain of its senior executives. The performance stock units are generally subject to a cliff vesting at the end of a three-year period. The vesting will vary between 0% and 200% based on the attainment of operating income goals over the three-year vesting period. The performance stock units are expensed on a straight-line basis over the three year vesting period.

Performance stock unit activity for the six months ended June 30, 2018:
 
Number of
Performance
Stock Units
 
Weighted-
Average
Grant-Date
Fair Value
Outstanding on December 31, 2017
185,891

 
$
23.82

Granted
102,138

 
25.81

Vested and converted to common stock
(43,361
)
 
23.64

Forfeited
(43,057
)
 
23.83

Outstanding on June 30, 2018
201,611

 
$
24.87


As of June 30, 2018, there was $2.6 million of pre-tax unrecognized compensation expense related to unvested performance stock units, which is expected to be recognized over a weighted average of 2.3 years.
 
13.
Restructuring

Restructuring Charges

In 2017, the Company recorded restructuring charges of $15.7 million in connection with initiatives to reduce overall costs and improve operational efficiencies. The primary components of the restructuring include: the elimination of two executive officer roles for a flatter leadership structure; a workforce reduction as the firm aligns its support resources to better meet operational

15




needs and recognize synergies with the combination of Leadership Consulting and Culture Shaping; a reduction of the firm’s real estate expenses and support costs by consolidating or closing three of its locations across its global footprint; and the acceleration of future expenses under certain contractual obligations. These charges consist of $13.1 million of employee-related costs, including severance associated with reductions in our workforce of 251 employees globally, $2.3 million of other professional and consulting fees and $0.3 million of expenses associated with closing three office locations.

Changes to the accrual for restructuring charges for the six months ended June 30, 2018, are as follows:
 
Employee Related
 
Office Related
 
Other
 
Total
Outstanding on December 31, 2017
$
11,866

 
$
148

 
$
1,011

 
$
13,025

Cash payments
(5,894
)
 
(248
)
 
(976
)
 
(7,118
)
Other
(1,869
)
 
100

 
27

 
(1,742
)
Exchange rate fluctuations
(56
)
 

 
(5
)
 
(61
)
Outstanding on June 30, 2018
$
4,047

 
$

 
$
57

 
$
4,104


14.
Income Taxes

The Company reported income before taxes of $18.4 million and an income tax provision of $6.9 million for the three months ended June 30, 2018. The Company reported loss before taxes of $28.7 million and an income tax benefit of $10.4 million for the three months ended June 30, 2017. The effective tax rates for the three months ended June 30, 2018 and 2017, were 37.7% and 36.3%, respectively. The effective tax rate for the three months ended June 30, 2018 was impacted by one-time items and the Tax Cuts and Jobs Act enacted on December 22, 2017 in the United States. The effective tax rate for the three months ended June 30, 2017 was impacted by the deferred tax effect on the long-lived assets and goodwill impairment and the inability to recognize losses in certain jurisdictions.

The Company reported income before taxes of $31.3 million and an income tax provision of $9.7 million for the six months ended June 30, 2018. The Company reported loss before taxes of $24.6 million and an income tax benefit of $7.0 million for the six months ended June 30, 2017. The effective tax rates for the six months ended June 30, 2018 and 2017, were 30.9% and 28.4%, respectively. The effective tax rate for the six months ended June 30, 2018 was impacted by one-time items and the Tax Cuts and Jobs Act enacted on December 22, 2017 in the United States. The effective tax rate for the six months ended June 30, 2017 was impacted by the non-deductibility of the employee benefit tax settlement, the deferred tax effect on the long-lived assets and goodwill impairment and the inability to recognize losses in certain jurisdictions.

The Company estimates that its effective tax rate for the year ended December 31, 2018, will be between 33% and 37%. The full year effective rate for 2018 is primarily the result of one-time items and the Tax Cuts and Jobs Act.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities, foreign earnings intended to be remitted, and the tax on foreign earnings intended to be remitted. The Company has included these amounts in its consolidated financial statements for the quarter ended June 30, 2018. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018. 


16




15.
Changes in Accumulated Other Comprehensive Income

The changes in Accumulated other comprehensive income (“AOCI”) by component for the six months ended June 30, 2018 is summarized below:
 
 
Available-
for-
Sale
Securities
 
Foreign
Currency
Translation
 
Pension
 
AOCI
Balance at December 31, 2017
 
$
6,089

 
$
9,143

 
$
(1,917
)
 
$
13,315

Other comprehensive income before classification, net of tax
 

 
(2,226
)
 

 
(2,226
)
Amount reclassified from AOCI
 

 

 

 

Net current period other comprehensive income
 

 
(2,226
)
 

 
(2,226
)
Adoption of accounting standards (1)
 
(6,089
)
 

 

 
(6,089
)
Balance at June 30, 2018
 
$

 
$
6,917

 
$
(1,917
)
 
$
5,000

 
(1) Upon adoption of ASC 2016-01, unrealized gains (losses) on available for sale securities was reclassified from AOCI to retained earnings.

16.
Segment Information

In 2018, the Company completed the integration of its Leadership Consulting and Culture Shaping businesses into one combined service offering, Heidrick Consulting. In conjunction with the integration, the Company reorganized its Management Committee, which the Company considers to be its chief operating decision maker, so as to regularly assess performance and make resource allocations decisions for the Heidrick Consulting business. Therefore, the Company now reports Leadership Consulting and Culture Shaping as one operating segment, Heidrick Consulting. In conjunction with the change in operating segments, the Company modified its corporate cost allocation methodology. Previously reported operating segment results for the three and six months ended June 30, 2017, have been recast to conform to the new operating segment structure and corporate cost allocation methodology.

The Company currently operates its executive search business in the Americas, Europe (which includes Africa), and Asia Pacific (which includes the Middle East), and operates its Heidrick Consulting business globally.

For segment purposes, reimbursements of out-of-pocket expenses classified as revenue and other operating income are reported separately and, therefore, are not included in the results of each segment. The Company believes that analyzing trends in revenue before reimbursements (net revenue), analyzing operating expenses as a percentage of net revenue, and analyzing operating income, more appropriately reflects its core operations.

The revenue and operating income (loss) by segment are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017